Case Study: Economic Analysis of Gogo’s In-flight Wi-Fi
November 2, 2015
Introduction
Gogo pioneered and now dominates the in-flight Wi-Fi business, which allows passengers to access the Internet during their flights. In recent years, consumers have grown from anticipation to dislike towards Gogo’s services due to its steady increase in fees and rapid decrease in speed.
Through a dynamic pricing strategy they hope to relieve congestion which indeed have effect, but will not last in the fierce competition of an oligopoly market structure. Unlike its monopolistic position before, Gogo now faces at least three companies—ViaSat, Global Eagle
Entertainment, and Panasonic— swiftly eroding its market share with cheaper and faster in-flight
Wi-Fi services using satellites instead of antennas. Gogo’s own next-generation technology 2Ku, to come online in 2016, uses satellites that hopefully would achieve better prices with higher speed. To analyze the market for in-flight Wi-Fi and the pricing strategies of Gogo, our paper will discuss five core areas:
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The price elasticity of demand for Gogo’s service, and how it varies with price levels
The market structure Gogo is operating in
Its dynamic pricing
How the demand for in-flight Wi-Fi has changed over time, technological changes over the past 15-20 years that has affected demand
Technological factors that affect supply, how congestion affects pricing and our recommendation Price Elasticity of Demand for Gogo’s Service
To better analyze the price elasticity of demand for Gogo’s service, we will discuss those factors that affect the price elasticity of demand.
The availability of a substitute: though there is no substitute for the use of Wi-Fi available to a traveller who is onboard a flight installed with Gogo, the traveller has a range of airlines like
Southwest and JetBlue to choose from that offer cheaper and faster Internet connectivity than that being offered by Gogo. Thus among general users, Gogo tends to be elastic. When Gogo increased its prices for its service, most of its subscribers had to stop using Gogo or switch over to an airline that offered a cheaper price.
The degree of necessity or luxury: Many air travellers view the use of Wi-Fi whiles in the cloud a luxury rather than a necessity. To them surfing the web, reading their emails and watching
Netflix on the plane is an activity that can wait if they view their price tag quite exorbitant, any change in price will effect a reaction to demand for in-flight Wi-Fi accordingly. Earlier this year,
Gogo increased the prices of its service from $45 to $60, many of its customers complained and a number of users stopped using their service, to them demand for Gogo is elastic to the level of price being charged. On the other hand, among its subscribers, its main users; business travelers

regard this service a necessity rather than luxury. They will pay any price to be able to read, send emails, and complete their work. Ultimately for these people, their companies foot the bills and will rather Gogo increase its prices so that the ordinary subscriber using it to surf the web and post pictures on Facebook will not be able to afford the service. This will reduce the capacity on the network to give them a better service. They are insensitive to price increments. Among them, the price elasticity of demand for Gogo service is inelastic. In Gogo’s latest quarterly financial filing, average revenue per aircraft was up 13 percent from 2014, “driven primarily by connectivity service price increases,” the report said. Farrar says: “They’ve found that there really isn’t much limit to what people are willing to pay if they have to get work done on the plane.” Another factor that affects the demand for Gogo’s service is the prices of related service. A major complaint among the users of Gogo is the price it charges for its service. As mentioned earlier, Southwest airways and JetBlue serving Global Eagle Entertainment and ViaSat respectively offer cheaper service prices than Gogo. Thus, when Gogo increased its prices the prices of ViaSat and GEE became relatively cheaper decreasing the demand for Gogo among its subscribers. According to company data published by Quartz, barely 7 percent of passengers on flights where Gogo is offered actually buy it.
Substitutes for Gogo’s Service
For Gogo’s service, there is no substitute. A case in point is that people who use yellow taxi as a mode of transport usually have options: the subway, lyft, walking. If you are on a Delta flight, it’s Gogo or no access to Internet connection in-flight. “The airlines have plenty of choices”, says Andrew De Gasperi, an analyst at Macquarie group. “It’s just that the passenger, who is the one who uses it doesn’t”. Thus, passengers on commercial flights with Gogo as the provider of
Internet service has no substitute to this service.
Market Structure
The market structure that Gogo is operating in is mixed. Basically it is an oligopoly, but in some aspects, it is a near monopoly.
In terms of the number of providers, the market structure is more like an oligopoly. First, an oligopoly is a market dominated by a few producers. Now there are basically four in-flight internet providers: Gogo, Row44(owned by Global Eagle Entertainment), Panasonic, and ViaSat.
Each company invests a lot of capital to produce the product --- the in-flight Wi-Fi. This large initial investment of capital makes it hard for other companies to enter the industry.
Besides, in terms of pricing, although in this case, Gogo raised its price randomly without considering what other companies would react, there are other options instead of Gogo’s in-flight
Wi-Fi. Customers can pick an airline with cheaper Wi-Fi, like Southwest, serving Global Eagle
Entertainment(GEE), or JetBlue, serving ViaSat. These can be seen as Gogo in-flight Wi-Fi’s substitutes before passengers choose a flight. In a word, Gogo has strong competitors in this market. Also, an oligopoly can produce either homogeneous or differentiated products. Gogo, ViaSat and
GEE all provide in-flight Wi-Fi to passengers. The difference is that ViaSat and GEE offer satellite-based in-flight Wi-Fi while Gogo provides In-flight internet based on ground towers.
And the ways that they are selling their products are different. As Sam Grobart cited in “Why
Gogo's Infuriatingly Expensive, Slow Internet Still Owns the Skies” on August 26, Gogo charges passengers directly and pays a check to the airlines for about 20 percent of the revenue, while
ViaSat and GEE’s avenues come from the airlines who write them a check for their service, and the airlines decide how much to charge.
However, on the other hand, the market structure is also like a near monopoly. First of all, Gogo, as the biggest Internet Service Provider used by many of American flight companies such as
American, Virgin America, Delta, Alaska Airlines and some United coast-to coast flights, has dominated about 80 percent of the market. And Gogo locked up these airlines into decade-long contracts so that ViaSat and GEE would not be able to penetrate and weaken its dominance.
Second of all, one characteristic of monopoly is that the monopolistic companies are price makers (William C. Spaulding), which means they can set the price of their product without worrying about what other companies would react. In this case, although the price of ViaSat and
GEE’s products are fairly low compared to Gogo’s, Gogo still raised the price significantly and adapted a new pricing strategy called dynamic pricing.
So we can see that the market structure that Gogo is operating in is lying between oligopoly and monopoly. However, the market is changing fast and no matter how long the contracts Gogo signed with the airlines, they are not going to last forever. ViaSat and GEE are marching forward strongly and are getting more and more market shares by signing with more airlines. The structure of the market will be more oligopolistic and less monopolistic.
Dynamic Pricing
When providing in-flight Wi-Fi to passengers, Gogo uses a strategy referred to as dynamic pricing. This unique pricing method includes the utilization of various tracking systems to compile data used to calculate demand for the product for each and every individual flight. This data is in-turn used to set each flight’s price for in-flight Wi-Fi accordingly. Of course, as demand for Wi-Fi increases, its price increases as well. In this way the price of in-flight Wi-Fi is completely flexible and constantly varying and passengers do not know how much they will be charged for the product until the moment they have boarded the plane and are approaching take off. The dynamic pricing strategy allows Gogo to take advantage of their forecasts of which flights are fuller and which are more likely to carry a large constituency of passengers who require their service. For instance, it was discovered that business travelers comprise the principal demographic of in-flight Wi-Fi users. For them, having internet access is a necessity, not a luxury. Thus, it comes as no surprise that the flights carrying the greatest number of business travelers, are also those with the highest demand for Wi-Fi and in-turn those on which the service is most expensive.

Using this reasoning it follows that Gogo charges a premium for Wi-Fi on flights on certain days of the week, as well as flights to and from certain destinations. Mondays and Fridays are most expensive as those are very common days for business travelers to be commuting, while
Saturday is cheapest as a result of the fact that very few business travelers fly in the middle of the weekend. In addition, a passenger on a flight heading from New York to San Francisco will pay more for Wi-Fi than a passenger flying from Detroit to Miami. This is due to the fact that the route from New York to San Francisco is much more likely to be taken by business travelers, whereas the route from Detroit to Miami by vacationers.
Despite passengers not being thrilled with Gogo’s use of this dynamic pricing strategy, this is in fact the proper pricing method for the company to employ. The explanation for this is that due to the fact that with the restricted technology that exists today there is only a limited amount of bandwidth that Gogo can supply to passengers on each flight. Demand for Wi-Fi on flights, especially those with numerous business travelers, greatly exceeds the maximum that Gogo is able to supply. If Gogo was to offer lower prices in order to attract more passengers on the flight to purchase Wi-Fi, the bandwidth would not be capable of holding up under the weight of all of the usage and the service would slow down dramatically. Thus, reducing the price would actually cause a downgrade in the product.
When in an interview Michael Small, CEO of Gogo, was confronted regarding the pricing strategy he responded, “There’s nothing to apologize for. We have trouble finding a business in
America that does anything differently.” He added that at a later point in time when new technologies are available which allow for additional Wi-Fi capacity, Gogo will increase its supply and lower its prices accordingly. At the very moment however, Gogo is able to capitalize on this imbalance between supply and demand and charge a high premium for their product.
Demand & Supply
Demand for in-flight Wifi has increased over time since its introduction on commercial aircrafts in 2008 by Gogo. In an interview conducted by FORTUNE, Michael Small, Gogo’s CEO said,
“Connectivity and what it has done for the world on the ground is obvious. So as soon as people are given the chance, they will consume it. People are addicted to the Internet.”
The emergence of powerful and affordable computing and communications devices in portable form over the past 15-20 years is the great technological change that escalated demand for inflight Wi-Fi. To begin with were the laptop computers, though the first with microprocessors became possible in 1974, it only became really accessible for the general public since in the past decade when they evolved into smaller, lightweight versions and most importantly, inexpensive.
The rise of smartphones and tablet computers, especially the iPad which was released in 2010, with improved computing abilities and the even lower price help made the Internet a seemly inseparable part of daily life on the ground.
Now all the highly portable and inexpensive electronic devices can use Wi-Fi pretty much everywhere on the ground, consumers start to expect to stay connected even in the air. Today no one goes on board without their smartphones, that’s at least one device wanting Internet for each

passenger, not to mention the additional tablets and laptops. The situation have been pushing the demand for Wi-Fi upward for years.
Meanwhile, the capacity of satellites and antennas affect supply, “the wireless network is by definition a shared network, as in the more devices connected to the same wireless access point, the less data each will be able to send and receive”. With more and more passengers going on board aircrafts with electronic devices requiring Wi-Fi to stay connected, the rate of Gogo’s improvement for their services is still behind to actually avoid congestion. Since there isn’t enough bandwidth to go around for everyone to access high-speed Internet, the prices of Gogo’s services has gone up over the years hoping to use higher price to lessen the congestion.
“If every passenger on a plane purchased Gogo's Internet, the service would slow way down.”, says Steve Nolan, a spokesperson for the company. So Gogo’s current strategy is to raise the price until the general consumers, who’s got more elasticity in their demand for Wi-Fi, to use less in order to accommodate the business travellers who perceive the Internet in-flight as inelastic. Business travellers are more willing to pay a high price for Internet connection to stay up-to-date for their work, they might even want a higher price so they can have all the bandwidth for themselves, and the costs are usually reimbursed by their employers. But the people who doesn’t fly that often, the general consumers who wants to stream videos in the air, still take up a high percentage of Gogo’s users. Congestion is the obstacle that needs to be reduced for higher profits. Under the current situation without a big step forward in technology, higher prices is the only solution to minimize congestion to its lowest level.
For Gogo to gain even more market share in the in-flight Wi-Fi business, is to provide higher speed with lower prices, which is only achievable with technological upgrades. If Gogo had chosen to stay put, other companies with new technology and faster speed will weaken its prominent position in the business. Gogo announced their newest technology 2Ku on April 2014 at the Aircraft Interior Expo, which uses Internet from next-generation spot-beam satellites instead of from ground antennas. They consider it to be the revolutionary solution to deliver unprecedented performance, with peak data speeds up to 70Mbps, and enhanced equatorial coverage. “We started with a 3 megabits-per-second system. Then we went to ATG-4, which is
9.8 megabits per second. Our 2Ku solution will be 70 megabits per second. So that’s a sevenfold increase from ATG-4.” Michael Small, CEO of Gogo, is quite confident of the new era in inflight Wi-Fi with their new technology.
Right now the situation is when Gogo charges more, there still is no improvement in capacity.
“They’re participating in something we like to call ‘incremental value capture’ without also offering a better service,” says Frances Frei, a professor at Harvard Business School. “If I’m going to raise your rates, I also have to give you a better value proposition.” It is possible that some better technology will come along not far into the future upending Gogo and the rest of the industry, “If you truly believe your position in the market is impenetrable, then treat your customers like s--- and gouge them,” Harvard’s Frei also says. “But I’ve seen very few organizations that get away with customers hating them.” To stay competitive in the in-flight
Wi-Fi market, Gogo will need to constantly put forward technological upgrades to provide a service worthy of their price.

Conclusion
Gogo’s product can be both elastic or inelastic in terms of the availability of substitutes and and the degree of necessity or luxury to a passenger. The market structure that Gogo is operating in lies between the category of oligopoly and near monopoly and is changing towards oligopoly with the increasing competence of ViaSat and GEE. Demand for in-flight Wi-Fi has increased over the years with the growth of inexpensive and lightweight electronic devices. While supply has not been able to keep up with the surging demand, Gogo is employing a dynamic pricing strategy in an attempt to lessen congestion on its bandwidth. This is a two pronged pricing method which allows Gogo to not only offer consumers a higher quality service, but at the same time to also maximize its profits. Hopefully the introduction of Gogo’s new satellite technology,
2Ku, in 2016 will revolutionize the industry and be able to satisfy its frustrated consumers while also strengthening its domination in the market. Currently, Gogo’s dominance as the leader in providing inflight Wi-Fi is due mainly to its first mover advantage. Customers’ complaint of high service charges and slow connection, we believe, is a problem they will have to find lasting solution to if it hopes to maintain its position. With the advent of new technology it is very likely that Gogo will not dominate the market for inflight Wi-Fi in years to come.

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